Can Transverse Eco-compensation Mechanism Correct Resource Misallocation in Watershed Environmental Governance?

A Cost-benefit Analysis of the Pilot Project of Xin’an River in China

Environmental and Resource Economics

Hong-Zhen Zhang, Ling-Yun He, ZhongXiang Zhang

· Abstract

Correcting resource misallocation that creates productivity and welfare losses is the key to correcting transboundary basin pollution. China has proposed a transverse eco-compensation mechanism (TECM) based on the traditional Coase scheme to solve the pollution of transboundary watersheds. But whether it can correct the misallocation of resources that cause productivity and welfare losses has been ignored in existing literature. This paper first conducts a theoretical analysis of the TECM’s resource allocation effect and operation mechanism. And on this basis, we use the cost–benefit analysis (CBA) method to show how TECM produced actions in relevant upstream regions towards correcting excessive pollution, and how TECM provided economic incentives for these regions to undertake these actions. The CBA analysis results are consistent with the theoretical analysis. The TECM project will benefit the upstream region with a discount rate of 3%, and the present value of the net income is 96.4 million yuan. The conclusion still holds in the case of different discount rates. The above results show that the TECM can correct the resource misallocation that creates productivity and welfare losses in cross-basin environmental governance, and provide economic incentives for upstream areas to correct environmental resource misallocation (excessive pollution). Finally, the TECM model has important policy implications for solving the problem of cross-basin pollution in other similar countries.

· JEL classification

Q53; Q56; Q58; O13

· Keywords

Transverse eco-compensation mechanism; Xin'an River; Resource misallocation; Cost-benefit analysis

文章全文参见链接：

https://link.springer.com/article/10.1007/s10640-022-00743-5